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Accounting Principle Notes

Accounting principles provide guidelines for recording business transactions consistently. They establish a common understanding of the accounting system. The 11 principles discussed in the document are: [1] Business Entity, [2] Money Measurement, [3] Dual Aspect/Double Entry, [4] Going Concern, [5] Historical Cost, [6] Accrual/Matching, [7] Realization, [8] Prudence, [9] Consistency, [10] Materiality, and [11] Substance over Form. These principles lay out the basic rules that govern accounting records and help ensure transactions are reported accurately.

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Martha Anton
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63 views

Accounting Principle Notes

Accounting principles provide guidelines for recording business transactions consistently. They establish a common understanding of the accounting system. The 11 principles discussed in the document are: [1] Business Entity, [2] Money Measurement, [3] Dual Aspect/Double Entry, [4] Going Concern, [5] Historical Cost, [6] Accrual/Matching, [7] Realization, [8] Prudence, [9] Consistency, [10] Materiality, and [11] Substance over Form. These principles lay out the basic rules that govern accounting records and help ensure transactions are reported accurately.

Uploaded by

Martha Anton
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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“Accounting principles help users to share a

common understanding of the accounting system.”

“Imagine how a school/class with no rules would be


like, do you think lessons would be successful?”

“And soccer? Do you think football matches would


take place successfully if they were not governed by
agreed rules and guidelines of football?”

“And so, this is the same song we are going to sing


in this chapter, which is all about understanding the
Rules avoid basic rules that govern the accounting records!”
anarchy,
confusions & We will now discuss these in more detail !!!
mistakes. . .
Accounting concepts/principles
1. Business entity
2. Money measurement
These Generally 3. Dual aspect/Double entry
Accepted
Accounting 4. Going concern
Principles (GAAP) lay 5. Historical cost
down accepted
6. Accrual/Matching
assumptions and
guidelines that guides 7. Realisation
and advise book- 8. Prudence
keepers in accounting
9. Consistency
for different business
transactions and 10. Materiality
events. 11. Substance over form
1. Business entity principle

Meaning: a business is accounted for separately from its owner(s).


 “In other words, only business transactions should be recorded in the
books of business.”
 Emphasis: the business and its owner(s) are two separate entities.
 The owner’s private transactions are to be ignored.
 Any private and personal incomes and expenses of the owner(s)
should not be treated as the incomes and expenses of the business.
1. Business entity principle

Examples:
– Telephone bills for the owner should be excluded from the telephone
expenses of the business.
– The owner’s property should not be included in the premises account of
the business.
– Any payments for the owner’s personal expenses by the business will be
treated as drawings and reduced the owner’s capital contribution in the
business.
2. Money measurement

Meaning: Only business transactions that can measured in terms of


money are recorded in business records.
 Emphasis: All business transactions should be expressed in monetary or
currency values.
 This help provides a common unit of measurement.
• Examples:
– Market conditions, technological changes and the efficiency, productivity
and skills of employees would not be recorded as these cannot be
measured in monetary values.
3. Dual aspect/Duality

Meaning: There are two aspects to every transaction, one debit and
one credit.
Emphasis: For every debit entry in a transaction, there should be a
corresponding credit entry of an equal amount.
Example:
“Serviced a machine on credit, N$ 580.”
Dr Repairs account as expenses increased as a result; and
Cr a Creditor’s account who serviced the machine as liabilities
increased.
4. Going concern

Meaning: The business will continue to operating or exist for the


foreseeable future.
Emphasis: The assumption is that the business will continue
operating instead of being closed or sold in a near future.
Financial statements should be prepared on a going concern basis
that the business will not be liquidated.
• This enables the business to carry out its strategic plans.
• Expenditure can be deferred over future periods.
4. Going concern

• Examples
– Possible losses from the closure of business will not be anticipated in the
accounts as it is assumed it will continue until further notice.
– Prepayments, Accruals, provisions for depreciation and doubtful debts may
be carried forward in the expectation of proper matching against the
revenues of future periods.
– Since non-current assets are bought to be used in the business for some
number of years, they are recorded at cost price from year of purchase till
their disposal.
5. Historical cost

Meaning: All transactions and events should be measured at their original cost
price on acquisition date.
 Emphasis: Fixed assets should be shown on the Balance Sheet at the original
cost of purchase instead of current value.
 Example: non-current assets
 The non-current assets are recorded at the cost price on date of acquisition.
 The acquisition cost includes all expenditure made to prepare the asset for its
intended use.
 It included the invoice price of the assets, freight charges, insurance or
installation costs. This also called capital expenditure.
6. Accrual/matching

Meanings:
Accrual: Incomes are recognized when they are earned, but not when cash
is received; and Expenses are recognized as they are incurred, but not when
cash is paid.
Matching: The revenue or income for the period should be matched with
the expenses for that period to assess the profit made.
Emphasis:
 Accrual: Income and expenses should be recognized as they occur but not
when cash is paid or received.
 Matching: To calculate correct profit, expenses of one period should be
matched with the income they generated in the same period.
Application: Accrual/matching

Examples:
 Expenses incurred but not yet paid in current period should be
treated as accrued expenses under current liabilities.
 Expenses already paid in the current period but to be incurred
in the following period should be treated as prepaid expenses
under current assets.
 Subsequently, Incomes earned but not yet received in current
period should be treated as accrued income under current
assets.
 Incomes already received in the current period but to be
earned in the following period should be treated as Income
received in advance under current liabilities.
 Depreciation should be charged as part of the cost of a non-
current asset consumed during the period of use.
7. Realisation

Meaning: Revenues should be recognized when the ownership of the


goods is legally passed from the seller to the buyer.

Emphasis: Revenues are recognized when they are earned, and not
only when money is received.
 Sales are recognized when the goods are sold and delivered or
services are rendered to customers, e.g. either when cash is received
or legal ownership is transferred.
7. Realisation

Example:
• Sales are recognized when the goods are sold and delivered
to customers or services are rendered, , e.g. either when cash
is received or legal ownership is transferred.
• We recognize sales when the buyer has admitted the liability
to pay for the goods or services provided and the definite
cash collection is relatively certain.
8. Prudence

Meaning: All the losses incurred or expected to be incurred are to be


taken into account to ensure profits and assets are not overstated.
Emphasis: Profits and assets are not to be overstated.
 Provisions is made for all known expenses and losses whether the
amount is known for certain or just an estimation should be
recorded to satisfy this principle.
8. Prudence

Examples:
 When determining the value of closing inventory, atleast two
values should be considered, i.e. its market price or its cost price.
Hence, valued at the “Lower of the cost or Net realisable value”.
Provisions for doubtful debts and depreciation are subtracted from
debtors and non-current assets respectively to minimize the reported
profits and the valuation of assets.
9. Consistency

Meaning: Businesses should apply the same accounting methods and treatments
from one period to the next.
Emphasis: Like items must be treated consistently in the records of the
business from period to period.
 More reliable for comparison of the results of different periods and
similar items can be followed accordingly.
 Changes are acceptable only when the new method is considered better and
can reflect the true and fair view of the financial position of the business.
9. Consistency

Examples:
The same depreciation method should be applied from one period to the
next.
If the business adopts straight line method in one period, it should not be
changed to adopt reducing balance method in the other.
If the business adopts a periodic inventory method, it should not be
changed to perpetual inventory method in the other period.
10. Materiality

Meaning: Only material items should be recorded, if this is in favour


of an easier treatment and would not affect a decision-maker.
 Proper accounting treatments are applied to material items only.
Emphasis: Immaterial amounts may be added with the amounts of a
similar nature and need not be presented separately.
 Materiality depends on the size and nature of the item.
10. Materiality

Examples:
 Stationeries bought are treated as an expense in the period they are bought
even if there were not fully used up to the end of the year.
The cost of small-valued assets such as calculators, pencil sharpeners and
staplers should be written off to the profit and loss account as revenue
expenditures, although they can last for more than one accounting period.
A N$60 stapler, with three-year useful life, is charged as an expense of the
period rather than depreciated over its three-year useful life.
11. Substance over form

Meaning: The substance of a transaction or economic event is more important


than its legal form.
Emphasis: A transaction should be shown in accordance with its real
substance other than its legal form.
Example:
 A vehicle bought on credit/hire purchase, legally belongs to the supplier
until paid for in full.
 In the business books, this vehicle will be shown under non-current
assets together with all other assets bought and paid for.
 However, the amount owed will still be shown separately under
liabilities.
Types of Receipts and Expenditure in the business

Capital expenditure: All expenses incurred to buy or add


value to non-current assets.
Revenue expenditure: All expenses incurred to cover daily
business operations.
Capital receipts: All receipts from sale of non-current assets.
Revenue receipts: All receipts/income from sale of goods or
rendering of services

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